In a new effort to persuade Iran to halt its nuclear program, the Obama administration and its European allies are asking Saudi Arabia to help them squeeze Iran’s vital oil sector without driving up world energy prices and damaging the global economy.
Officials in the United States, France, Britain and other countries have been lobbying the Saudis in recent weeks to produce billions more barrels of oil to provide an alternative source for buyers of Iranian oil.
The goal is to keep global prices stable while cutting Iran’s ability to sell oil on world markets. The move would come as Western governments add more sanctions to dissuade international customers from buying from Iran, now the world’s fourth-largest oil exporter.
A Western official said the Saudis have become “the great hope” for enabling the West to avoid an oil price increase while pressuring Iran to abandon its nuclear development program. U.S. officials say Tehran is fast approaching the ability to build a nuclear weapon. Iran says it is enriching uranium to generate electricity in power plants.
The Saudis have given some positive signals, but Western officials say it’s unclear whether they will follow through. Nor is it clear that the complicated scheme could avoid producing a destabilizing price surge that would push the world’s fragile economies into a deep downturn.
Guy Caruso, an energy expert at the Center for Strategic and International Studies think tank in Washington, said Saudi Arabia had enough reserves to avoid a disruption in supply to Iran’s European and Asian customers.
But he said oil prices could rise because of “psychological factors.” If the Saudis pump enough to satisfy Iran’s customers, the world oil production system “may be operating at 98% of capacity, and the markets do get spooked when you’re operating that close to the margin,” Caruso said.
Obama administration officials are already worried that new legislation in Congress could produce higher oil prices.
Lawmakers approved a defense bill Monday that would penalize foreign financial institutions that do business with Iran’s central bank. Administration officials persuaded Congress to weaken the bill by allowing the president to waive the sanctions if they appeared likely to cause oil prices to rise.
Advocates of the legislation acknowledge that higher oil prices could damage the U.S. economy but argue that Iran’s potential development of a nuclear weapon poses a greater danger.
The United States and Europe have gradually tightened sanctions on Iran’s energy sector, which provides about half the nation’s revenue. The European Union is now considering another round of sanctions for early next year.